MarketView for May 9

Summary 

Share prices picked up steam as commodity-related shares rebounded from last week's collapse. The result was that Monday was a reasonable day on Wall Street with all three major equity indexes ending the day in positive territory. However, despite the day’s gains there were doubts expressed during the day as to what will sustain the market's long-term strength.

Last week a massive sell-off in materials and oil forced investors out of high-risk assets, and stocks ended down about 1 percent for the week. The commodity-market slump comes at the end of a decent earnings season and as the Federal Reserve's bond-buying program also is due to end, leaving many on the Street wondering what catalyst will fuel more stock-market gains.

Energy and materials sectors were the best performers on the S&P 500. The S&P energy index was up 1.6 percent and the iShares Silver Trust exchange-traded fund also gained, rising 7.3 percent to $36.98. It was the most actively traded issue on the major exchanges on Monday, with about 108 million shares traded.

From a technical perspective, for the S&P 500, the 1,340 and 1,333 are key levels that should provide support. Despite last week's losses, the S&P 500 held above important technical levels, with the week's low just below 1,330 and Friday's close above 1,340.

Among some of the other worries on the Street, Standard & Poor's downgraded Greece's rating into junk territory on doubts Athens can manage its debt without imposing losses on private bondholders.

In the financial sector, Citigroup, which in recent months accounted for about 6 percent of total composite volume, fell 2.3 percent to $44.16 and pressured the market after the company's 1-for-10 reverse stock split.

About 5.76 billion shares traded on the major exchanges on Monday, a number that was well below the average of 7.73 billion so far in 2011 and much lower than last week's levels, possibly reflecting the change in Citigroup volume.

Reverse Split Could Be a Curse

Citigroup came to realize on Monday that reverse splits can be a curse as well as a blessing as its shares closed down 2.3 percent after a reverse 1-for-10 split that could be fruitful years from now, but tough going for some weeks. The higher stock price is more appealing to major fund investors but less attractive to screen jockeys seeking to trade the stock for quick gains.

Shares of the third-largest bank by assets ended the day down $1.04 to close at $44.16. The reverse split has the stock in double digits for the first time since October 2007, when the bank started to recognize billions of dollars of losses on bad loans. Often, companies will engineer a reverse split to keep from being delisted because their stock price has fallen through $1 a share. Many of those companies still don't survive.

For larger companies, the odds are better, though they often take a short-term hit. For example,

Priceline had a reverse split in 2003 when the shares were less than $5. It now trades at about $530. Some continue to struggle post-split. Ciena (CIEN.O) is down about 28 percent since its September 2006 split. Priceline.com was an exception, although the stock took a few years to take off. Shares of insurer American International Group fell in 2009 after a 1-for-20 reverse split, although the stock has rebounded since.

Larger companies often engineer a reverse split to boost their share price to attract institutions, some of which are prohibited from owning low-priced stocks. This often makes the shares less volatile as well. Citigroup, whose shares hit a nadir of 97 cents in March 2009 in the wake of the financial crisis, may be another -- but it depends on company performance.

Nonetheless, the reverse split sapped demand among retail traders attracted by Citi's previously low price. More than 49 million shares traded in Citigroup on Monday, down sharply from the average above 412 million shares traded daily over the past 50 days.

Greece Hammered By Rating Agencies

Credit ratings agencies hammered Greece on Monday after policymakers acknowledged that Greece will need a second bailout package and soon. The European Union is also looking to lower interest rates on rescue loans to Ireland within weeks and eyeing easier bailout terms for Greece as the EU moves deeper into crisis.

However, Standard & Poor's suggested far more radical measures would be required to make Greece's 327 billion euros ($470 billion) debt mountain sustainable. Specifically, S&P believes that Greece may have to reduce the face value of its bonds by up to 70 percent, implying big losses for investors.

S&P downgraded Greece's credit rating further into junk territory to B, just one notch above Pakistan's, hitting Greek bank stocks as investors sought safety in German bonds. The euro fell to its lowest level in three weeks against the dollar.

Moody's threatened to downgrade Greece by several notches, placing country’s B1 sovereign rating on review due to increased worries that it might seek to impose losses on private bondholders.

Fitch Ratings said it still rated Greece at BB+ with a negative outlook and would not comment on a report in German newspaper Sueddeutsche Zeitung that it planned to downgrade Greece's rating to B or B- this week.

The executive European Commission said it hoped for a decision within weeks on reducing the interest rate charged to Ireland to make Dublin's debt more sustainable. Irish Prime Minister Enda Kenny told parliament that without a return of strong economic growth, "questions of sustainability will remain" around his country's debt.

"There is no doubt that a reduction in the interest rate on the moneys we are borrowing from Europe would be a meaningful and appreciated measure," he said, predicting it could be delivered at a euro zone finance ministers meeting next week.

The new Irish government's bid for lower interest payments has so far been blocked by Germany and France, which want Dublin to drop its veto on harmonizing the corporate tax base in Europe in exchange or raise its own low corporate tax rate. Kenny made clear he would not consent to raise corporation tax.

In Germany, a senior lawmaker in Chancellor Angela Merkel's conservative party said a further cut in the rate on emergency loans to Greece, already reduced by one percentage point in March, would be justified if it carried out further reforms.

Michael Meister, finance policy spokesman of Merkel's Christian Democrats, told German radio he opposed any idea that Athens should restructure its debt or that it should consider leaving the euro zone. The calls for lower interest rates came after a select group of top euro zone policymakers held not-so-secret talks in Luxembourg on Friday evening on how to stem the crisis.

The cost of insuring Greek, Irish and Portuguese debt against default rose further and European shares fell on signs the three states are mounting a bidding war for easier terms by pointing to concessions made to each other. A report by German magazine Der Spiegel on Friday alleging that Greece was considering leaving the euro zone drew indignant denials from Athens and EU ministers. A Greek exit from the euro had never been under discussion publically.

Euro zone and EU finance ministers are due to meet next week to approve a 78 billion euro rescue for Portugal amid lingering uncertainty over whether Finland, which has a caretaker government and has not yet begun talks on a new coalition, will be in a position to give the required agreement. Pressure is mounting for those meetings to deliver decisions on Ireland and Greece as well, but euro zone sources said no action was likely on Greece until June at the earliest.

Greece, which has a debt mountain of nearly 150 percent of gross domestic product, is supposed to raise 27 billion euros in the market in 2012, according to the existing rescue plan.

It is likely that Greece will have to reduce its debt substantially by a mixture of rescheduling maturities, lower interest rates and convincing private investors to take voluntary losses to avoid a disorderly default. There is also concern that Ireland will be unable to repay its debt, set to reach 120 percent of GDP, and will face mounting political pressure to make bank bondholders share the cost.